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Does the Tick Size Affect Stock Prices?

Traders Magazine Online News, November 16, 2018

Salil Pachare and Ilia Rainer

The Securities and Exchange Commission has recently released a whitepaper examining the change in tick sizes on trading based on data it collected during the Tick Size Pilot. 

Here is the release from the SEC and link to the paper. 



The Tick Size Pilot (“Pilot”) increased the tick size from $0.01 to $0.05 for certain small capitalization stocks randomly assigned to three Test Groups. We find that the announcement of the assignment of stocks to the Test Groups and the Control Group did not generate significant abnormal returns for stocks in the Test Groups, neither in absolute terms nor relative to stocks in the Control Group. These results hold even when we limit the
analysis to stocks with pre-Pilot quoted spreads smaller than $0.05.

Our findings suggest that the market did not expect the Pilot to affect stock prices of companies in the Test
Groups. Under the standard assumption that the market’s expectations about the effects of the Pilot were correct, this result indicates that the increase in tick size associated with the Pilot had no impact on stock prices. Thus, from a policy perspective, our findings cast doubt on the idea that similar changes in tick size can affect cost of capital of small capitalization companies.

In particular, our findings are inconsistent with the view that the increase in tick size harmed companies in the Test Groups because reduced liquidity of their stocks led to lower investor demand and lower stock prices. At the same time, our findings are also inconsistent with the view that the increase in tick size benefited companies in the Test Groups because stronger incentives of market makers to promote their stocks led to higher investor demand and higher stock prices.

Download the entire Whitepaper here

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